Canada’s banking regulator says excessive borrowing prices and a wave of anticipated renewals within the coming 18 months pose key dangers to Canada’s monetary system.
With 76% of excellent mortgages anticipated to return up for renewal by the top of 2026, OSFI says owners face the chance of fee shock, significantly those that took out mortgages between 2020 and 2022 when rates of interest had been at historic lows.
“Households which might be extra closely leveraged and have mortgages with variable charges however fastened funds will really feel this shock extra acutely,” OSFI mentioned in its Annual Danger Outlook for 2024-25. “We anticipate fee will increase to result in a better incidence of residential mortgage loans falling into arrears or defaults.”
OSFI notes that monetary establishments may face increased credit score losses within the occasion of a weakened residential actual property market. It added that mortgages which have already skilled fee will increase, equivalent to adjustable-rate mortgages, are already exhibiting increased charges of default.
In response to this danger, OSFI mentioned its beforehand introduced loan-to-income limits for lenders’ uninsured mortgage portfolios will assist “forestall a buildup of extremely leveraged debtors.”
In March, OSFI confirmed that federally regulated banks should restrict the variety of mortgages that exceed 4.5 occasions the borrower’s annual earnings, or in different phrases these with a loan-to-income (LTI) ratio of 450%.
“We don’t anticipate these limits to be binding underneath the present rate of interest atmosphere,” OSFI famous, including that these institution-specific loan-to-income limits are “supervisory actions” and that no extra particulars may very well be disclosed.
Moreover, OSFI mentioned its determination in December to depart the minimal qualifying fee for uninsured mortgages unchanged on the better of the mortgage contract fee plus 2% or 5.25% will “assist guarantee debtors can nonetheless make funds in the event that they expertise detrimental monetary shocks…”
Fastened-payment variable-rate mortgages nonetheless a priority
OSFI additionally as soon as once more singled out variable-rate mortgages with fastened funds as a “particular concern.”
These mortgage merchandise, that are provided by most massive banks aside from Scotiabank and Nationwide Financial institution, preserve month-to-month funds fastened whilst rates of interest fluctuate. When charges rise, as they’ve over the previous two years, much less of the month-to-month fee goes in direction of principal reimbursement and a better portion finally ends up going in direction of curiosity prices.
These mortgage merchandise at present make up about 15% of excellent residential mortgages in Canada.
“If mortgage charges stay elevated, the monetary dedication required by debtors to return to their contractual amortization (for instance, lump-sum fee, mortgage fee enhance) could put monetary pressure on a lot of these households,” OSFI mentioned.
This isn’t the primary time OSFI has voiced its considerations about fixed-payment variable-rate mortgages. Final fall, OSFI head Peter Routledge informed a Senate standing committee that the regulator views such mortgages as a “harmful product” that put sure debtors at elevated danger of default.
Whereas he mentioned OSFI’s function is to not “impose a judgment on product design,” Routledge did say OSFI believes “the system could be more healthy with much less of that product.”
Different dangers going through Canada’s monetary system
OSFI’s Annual Danger Outlook additionally addressed different dangers going through the monetary system. These embody:
OSFI says wholesale credit score danger, which incorporates business actual property (CRE) lending in addition to company and business debt, “stays a big publicity for establishments.”
The regulator famous that increased rates of interest, inflation and decrease demand “have put CRE markets underneath stress” and that it expects these challenges to increase into 2024 and 2025.
- Funding and liquidity dangers
OSFI notes that liquidity dangers “are a persistent concern” and may come up if depositor behaviour shifts dramatically.
“Funding and liquidity danger stays linked to credit score danger as deteriorating situations can negatively impression securitization markets,” it mentioned. “This may set off elevated liquidity danger for establishments that depend on securitization as a key supply of funding.”
In response, OSFI mentioned it plans to broaden and intensify its evaluation of liquidity danger.
